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What you should know about your investment platform

South African investors have way too little information to make informed choices about their investments, many of which are made through investment platforms chosen by financial advisers.

Investors have some 3.6-million accounts and R1.4-trillion invested through these fund supermarkets that offer access to a variety of unit trust funds and exchange traded funds (ETFs). But many investors don't realise that they use an investment platform - or linked investment service provider - and are ignorant of the fee structures.

You are likely to be investing on a platform provided by a financial institution if you are free to choose funds from a variety of asset managers. You may, for example, be invested on the Allan Gray investment platform and get statements from that company but be invested in Allan Gray funds as well as those from Coronation, Investec and Foord, to name a few.

Platforms make it easy for you to switch between underlying unit trust funds and ETFs, and may also give you access to shares, private equity funds or structured products.

Why should you care?

Platforms have different fees and fee practices, fund offerings, services, tools and research offerings, and some are more stable than others.

Investors who choose their own platform are in the minority - most platform users are on a particular platform because their adviser recommended it or it's the platform on which their retirement fund operates.

Independent advisers should choose a platform after a careful due diligence. The first investment platform survey, recently released by the Collaborative Exchange, is intended to help advisers do this research, but not all platform providers participated and not all were open about the financial soundness of their operations.

Tied agents employed by a financial institution are likely to place you on a platform within the group for which they work and this will in turn determine the fees you pay, your choice of investments, the services you enjoy and the peace of mind you can have about your platform.

How the fees work

Platform administration fees are typically charged on a sliding scale with cheaper fees for those who invest more.

They start at around 0.46%-0.58% for people with R1m or less to invest and drop to between 0.12% and 0.35% if you have more than R5m to invest, the Collaborative Exchange's recent South African platform survey shows. The data relates only to charges on discretionary investments, not investments you are obliged to make with retirement savings.

The founder and CEO of the Collaborative Exchange, Kevin Hinton, says there isn't much of a range in administration fees, indicating a lack of competition. But the platform fee is only one of the fees you will pay - you also pay the asset manager for managing the funds in which you invest. If your independent adviser uses one, you may also pay a discretionary investment fund manager to select managers and blend funds.

Independent financial advisers and their discretionary investment managers who place large amounts of their investors' money in a range of funds on a platform are able to negotiate lower asset management fees in special fee classes to offset the fees you pay them and the platform.

Platforms do not disclose the fee discounts advisers enjoy, the platform survey shows.

Some platforms offer you reduced fees if you invest in the funds managed by the asset manager in the group. For example, Allan Gray charges 0.2% for investments in funds managed by itself or its offshore sister company Orbis, regardless of the amount.

If you are happy to invest with one manager this may sway your decision on which platform to use.

Fund switches

At a presentation on the survey hosted this week by Glacier, the platform in the Sanlam group, Hinton said the complexity of fund offerings and fee classes on the different platforms can make switching between platforms "perilous".

You can switch your fund holdings from one platform to another if the funds and the fee classes you hold are also available on the new platform, but if you have to sell a fund on one platform and buy into a new one on another platform you may incur capital gains tax (CGT).

When switching retirement annuity funds you won't incur CGT but you need to do what is known as a section 14 transfer, which is governed by the Pension Funds Act.

The survey also records the times taken for fund switches on platforms - anything from one day to eight days. Hinton noted that many South African platforms don't offer much automated processing, which leaves room for human error.

Buy lists

Many platforms offer "buy lists" or lists of recommended funds based on their research. Others make use of independent fund ratings.

But Hinton says that though South African platforms were reluctant to say how profitable they are, in the UK they are barely profitable. In SA, many platforms are too small to achieve economies of scale, he says.

Platform providers may therefore be tempted to use their buy lists to channel investors to funds within their own group where they can earn more fees in aggregate, he says.

The depth and frequency of research carried out by your platform is also a consideration to ensure the buy list is not too backward-looking, since past performance is no guarantee of future performance.

The survey reveals the percentage of funds on each participating platform's buy list that is invested in funds managed within the same group - anything between 2% and 86%, but in some cases the group's funds are popular investor and adviser choices. Other platforms host their own multimanaged funds that target different returns above inflation depending on your appetite and ability to take investment risk. Advisers using these platforms may recommend these in-house funds to their clients.